What is the Law of Comparative Advantage?

And How Does it Apply to Teams?

The Law of Comparative Advantage was first formulated by the famous economist David Ricardo who was born in the Netherlands in 1777. He used it to demonstrate that self-sufficiency of nations leads to poverty and trade leads to wealth of nations.  

It applies to the following situation. Country A and B are countries which do not trade and produce everything they need themselves from computers to crops. However, Country A is relatively better at making crops and Country B is much better at making computers. What then is best for both countries?

It then makes sense for Country A to focus on growing crops and Country B to focus on making computers and to set up trade between the two countries. Both countries will be better off, they will get high quality products for the lowest possible price. This is why free trade areas are important economically. It enables each region to do what they are best at, whereas trade restrictions penalize that.

Ask yourself now, is my organization or my team a free trade area or not? Am I using the specific qualities of my people and letting them help each other to reach common goals? Or have I set up silo’s in which people work more or less alone?

A good example of how this works in teams is the following. When working with the Dutch women’s hockey team, the coach told me that there were moments in games when the team could not handle the pressure and got stuck. What we did was simulate stress in a team game to find out what happened to the team under stress. Well, typical things happened. The dominant players in the team became more dominant, they tried harder, became more vocal and in front of our eyes we could see the team disintegrate.

There happened to be a quiet, introverted, observing and analytical player who had the ability to see where the team got stuck and what needed to be done to get the team performing again. Her role became to inform the captain of this so that she could give orders and change things on the pitch. The captain was really good at directing the team, but not so much at analyzing and observing, especially in the heat of the game. This player normally preferred to work very hard for the team behind the scenes. But in this new role she had to use a quality in which she had a comparative advantage and contribute it to the team. She had to show situational leadership.

Another player noticed that when the team disintegrates under pressure that people emotionally abandoned the team, they gave up and stopped caring inwardly (while outwardly still going through the motions of team). She had a kind of 6th sense for this. Her role became to use her intuition to pull the team together and make sure everyone was involved, standing strong together.

Another example is a sales team I worked with. One person was great at understanding the client’s need and promoting a good solution. But he was a terrible negotiator and lost the company money. Another team member was a great negotiator but not so good at promoting a solution. And yet they always had to work individually with their clients! From this analysis the idea was born to work on clients in teams and find the right mix of personalities and skills.  Another solution could have been that the great negotiator teaches the weak negotiator some basic negotiation skills or supports him behind the scenes during a negotiation.

Whether about international economics or teamwork, the principle stays the same. There is always something that you are relatively better at than others and your job is to contribute that for the benefit of the whole. When members of the team show situational leadership and “trade” theirs gift, everyone is better off.